An eclectic document published by the Gulf Research Center of Dubai discusses The Role of Gold in the uniifed GCC Currency (downloadable from GATA.org). The point of the paper is to examine an increased monetary role for gold in the Persian Gulf national banking and monetary systems.
The author, Eckart Woertz, a bond analyst in Dubai, cites Mises, Rothbard, Skousen, Sennholz and other Austrian economists, although in some cases critically. His discussion of the current monetary system, dating from the Bretton Woods agreement, though present dollar buying cartel follow lines that are familiar to readers of this site. The gulf countries, in his view, have tied their economies unwisely to the value of the US dollar.
Austrians will be disappointed to read that author believes that the growth of government is necessary for economic growth. Woertz also recognizes that a gold-based monetary system would bring about the end of the current welfare state, regretabbly in his view. There is some discussion of the “Islamic Dinar”, a proposal by Prime MInister Mahathir of Malaysia to set up a gold-exchange standard for trade among Islamic nations, with the intention of protecting the regions from currency crisis. Woertz explains that the proposal failed for various reasons, not the least of which that some gulf countries have sold off most or all of their central bank gold reserves.
Quoting from the conclusion:
- The paper dollar standard is a dead man walking. Its debt, accumulated over the recent decades, is too high to be effectively repaid. It will either default or be inflated to such an extent that it will not hurt to “pay” it back. Therefore, the accrued imbalances in global finance and the inherent weakness of worldwide growth models that rely on a continuance of US deficit spending are likely to usher in a serious crisis of currency systems during the course of the coming years. As the dollar is not only the currency of the US but the most important reserve, trade and debt currency on which all the other nations rely, it will not be a regionally confined currency crisis as happened in Mexico, Asia or Russia in the nineties; but will affect all other currencies and economies as well. That is also true for the Euro. Although it is less weak than the dollar, it will be affected and eventually engage in competitive devaluations with other currencies rather than emerge as a new world currency.
Gold will be a suitable means of asset protection and ultimate payment in such a scenario. It will preserve the wealth of individuals and central banks alike and will ensure important manoeuvrability for the latter. At the same time, the need for Gold accumulation could lead to serious conflicts between citizens and government agencies, should the latter try to get a hold of the accumulated gold of its citizens by declaring it illegal like in the SA in 1933, or by pressing for an exchange into local paper currency like in Korea and Thailand in 1997/ 98.
While individuals in the GCC countries highly value gold as a means of asset protection, GCC central banks are particularly ill prepared for such a crisis scenario. With currencies pegged to the dollar, oil factored in dollars and most of its currency reserves and investments in dollars, they are highly affected by the woes of the paper dollar standard. At the same time, they only have tiny gold reserves or none at all. In contrast to other central banks that have cautiously started to anticipate a post paper dollar standard environment (e.g. Euroland, Russia, China), the GCC monetary authorities indulge in official oaths of allegiance. During the recent GCC monetary union onference in Bahrain, the IMF asked the GCC countries to peg their common currency in 2010 to the dollar.
The justification given rested solely on the successful maintenance of the paper dollar standard. As stated: “Since most exports and external assets have been dollar-denominated, the peg assured external stability. It also provided a credible nominal anchor for monetary policy, ensuring price stability.”53 Yet while may be true for the past, once the paper dollar standard is tumbling the whole argument takes the opposite direction – to instability of external trade, prices and monetary policy. Thus, apart from further diversification of their economies and gradual diversification into “second worst”-currencies like the Euro, GCC countries would need to reclaim their leased out gold and build up a substantial gold reserve, as long there is still the time to buy it. Once the crisis scenario unfolds and the attempts of central and commercial banks at gold price suppression fail, the gold price will more than rise – it will explode to the upside.
{ 13 comments }
I’m beginning to think that Orwell should have had a fourth slogan in 1984, to go along with “War is Peace, Freedom is Slavery, and Ignorance is Strength.”
“Slips of paper issued by the government are valuable”
There has never been a President Mahatir of Indonesia.
There was a Mahatir in Malaysia, who recently retired.
That would be why it says “President Mahatir of Malaysia”, not “President Mahatir of Indonesia”. But his title was Prime Minister, not President (there is no president of Malaysia). Oh, and his name has an “h” in it: Mahathir.
Is that the Jacques Chester with whom I once corresponded? If so, wie gehts?
A number of points on this proposal. For historical reasons, and to make coinage work more easily in people’s hands, it would be wise to use silver rather than gold. The Maria Theresa Thaler is already in use in the area, and widely known.
It would be a good idea to issue any coinage with a high initial discount, supported by accepting it at that value for tax purposes. This would serve as a buffer for many transitional purposes (including any social security concerns). We should note that the commercial demand for silver is falling as digital photography becomes more widespread.
There is no fundamental inconsistency between bullion based systems and fiat currency based systems, except for the slack it offers. Building in a portion of slack with the tax discount solves most problems, but one remains. This was hinted at by the idea that many states had offloaded their bullion reserves. The switch, no matter how gentle the transition, would bring in outside bullion in exchange for items with value in use, in trade, or in other ways – a loss to stakeholders in the local economy.
The only true solution is to set the discount so low that local bullion stocks do not need supplementing, then have export taxes and taxes on absentee owners of assets generating revenue streams so as to claw back any windfall gains. Naturally this would have policing costs which would be easier to bear the larger the area covered by the new (revived?) system.
Of course, unwinding a bullion based system allows a windfall to be transferred to the state that issues the usurping fiat currency. This is one of the historical temptations towards it, as well as one of the obstacles to reversing it.
Robert:
My contention is that their has always been a very strong correlation between the price of oil and the price of gold, and that this correlation even straddles major dollar-gold jumps, as occured when Nixon abandonded Bretton-Woods, and the recent run up in the price of oil and gold and the large decline in the dollar. One of the advantages offered by the dollar was protection from inflation/devaluation. The recent decline of the dollar against other major currencies has led to a vote of no confidence in the dollar.
I would further speculate that the part of the trend towards hard assets and preference for the Euro instead of the Dollar stems from a lack of confidence in dollar-based deposits following actions of the US Treasury following 9/11. Middle Eastern countries do not have confidence that dollar-based deposits will not be targets for (unwarranted and unlawful) unilateral seizure, or that Sovereign banking transactions will be afforded the appropriate level of privacy – by this, I mean the inability of a European branch of a US-based bank to refuse to divulge confidential information resulting from a request of the US Treasury or the IRS.This can only encourage the search for other safe havens.
Quick notes.
Peter – an earlier version of this article incorrectly identifed the famously recalcitrant leader of Malaysia as “President of Indonesia”. I did however spell his name wrong. My apologies to Dr Mahathir.
P M – yes, ’tis I. The internet is a small place.
There has been a functional gold dinar/silver alternative available to the Islamic world for nearly five years now.
http://www.e-dinar.com
Would that they would notice.
P.
Pellinore, e-anythings are not an adequate substitute for bullion, for precisely the reason that they rest on something else outside them that guarantees them.
PML,
Digital gold is not substitute for bullion, but a radical improvement wrt to the monetary use of gold.
See also:
Crowne Gold
E-Bullion
e-gold
GoldMoney
Pecunix
Along with the previously-linked e-dinar.
Each has its own particular strengths and attraction to its user base, but the features they commonly is that they vastly improve the ability to use gold as money, by enabling transactions so small that they would be impractical on a “hand to hand” exchange, by dramatically reducing the cost of storage and security for the average user, by eliminating shipping costs (in both money and time) and by mitigating the complications of international transactions (cross-border security, reporting and privacy issues, etc.)
Pellinore
You misunderstand me. When you have e-gold of whatever sort, you do not have gold in your physical possession. And therefore your connection to it is indirect and mediated by others, not reliably under your control. It no more means you “own gold” than if you own shares in a gold mining company, or if in the old days you owned bank notes that a central bank had undertaken to redeem in gold.
But if you have gold coins, even if they were falsely labelled as holding more gold than they do, whatever gold you have there is all yours. Including the costs of holding it, of course.
If you have notes from a bank that will redeem them in gold, then you have gold. The problem is only when the bank “suspends” redemption. And they only do that because they’re working on fractional reserve. Trustworthy DGCs (a) are not fractional reserve fraudsters, (b) will redeem in gold bullion, and (c) have good governance procedures and regular audits. If you have GoldMoney or Pecunix, you have gold. If you have e-gold, there’s a pretty good chance you have gold (it’s not certain they’ll unbail bars, and they haven’t had an audit lately). I don’t know about the others. It’s certainly nothing like owning shares in gold mining company. Or an ETF.
don’t forget all the fees for those e-gold variants and ETFs!
Update from 19 July 2010:
http://www.fmxconnect.com/fmxmetalsconnect/post/2010/07/19/Guardian-Can-Malaysias-Islamic-gold-dinar-thwart-capitalism.aspx
Comments on this entry are closed.